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1.2 Theoretical Framework Principles and Practices of Accounting Paper 1
New Terms
Accounting – The language of business as it aims to meet the information needs of
sound and rational decision makers.
Substance over form - An accounting concept according to which the substance and
not merely the legal form of transactions and events governs their accounting treat-
ment and presentation in financial statements.
Expense - A cost relating to the operations of an accounting period or to the revenue
earned during the period or the benefits of which do not extend beyond that period.
Assets - Tangible objects or intangible rights owned by an organisation and carrying
probable future benefits.
Liability - The financial obligation of an organisation other than owners’ funds.
Prudence - A concept of care and caution used in accounting according to which (in
view of the uncertainty attached to future events) profits are not anticipated, but
recognised only when it is realised, though not necessarily in cash or cash equivalents.
Under this concept, provision is made for all the known losses and liabilities, even
though the amount cannot be determined with certainty and represents only a best
estimate in the light of available information.
Transaction – Means a business, performance of an act, an agreement.
Event – Means a happening, as a consequence of transaction or transactions, a “result”.
1.1 Introduction
An economic activity is performed by every individual. Some economic activities may
generate individual benefit whereas some create social benefit, i.e. benefit for the
public. These economic activities are performed through transactions and events.
EXAMPLE 1.1 Transaction and Event
Central Government raises money
through taxes and invests them in
various developmental activities. These TIPS & TRICKS
activities may results in surplus or Surplus – Excess of income over
deficit. In this case, transaction is expenditure
raising money through various sources TIPS & TRICKS
and event is surplus or deficit at the Deficit – Excess of expenditure over
end of the accounting year. income
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